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Financial Elites Seem Oblivious To Threat Of Economic Calamity

This article was produced by Economy for All, a project of the Independent Media Institute.

Can runaway booms descend into busts absent monetary tightening by the world’s central banks? I pose this question in the wake of an extraordinary exchange on January 22 at Davos between Bloomberg editor-at-large Tom Keene and Bob Prince, co-CIO of Bridgewater Associates, in which the latter posited the notion that “we’ve probably seen the end of the boom-bust cycle.”

It is striking that one of today’s titans of finance has given us what appears to be another version of “this time it’s different,” which the famous investor Sir John Templeton once described as “the four most expensive words in investing.”

My own basic take has been that the U.S. economy over the past three years has been weaker than the underlying quantitative data suggests and that there is ample historical precedent to suggest that credit cycles can end, even in the context of a low interest rate environment, notably via a deterioration in the quality of credit itself, as the great economist Hyman Minsky once explained in his financial instability hypothesis. The truth is that for decades, the U.S.—indeed the entire global economy—has been characterized by an economically unsustainable model in which larger and larger portions of GDP gains have been going to a smaller number of people at the top (who also have a higher propensity to save than people with lower incomes, which means the “trickle-down” effect is minimal to nonexistent). Wage gains also appear to be leveling off, which could have ominous implications for sustainable future growth. Yet many investors like Prince seem to accept today’s buoyant asset bubbles as a given in the absence of a concerted effort by the central banks to “take away the punch bowl just when the party gets going” (in the famous words of former Fed Chairman William McChesney Martin), via higher interest rates.

In the words of Bob Prince (quoted in Doug Noland’s Credit Bubble Bulletin):

Bob Prince…: “2018 I think was a lesson learned. The tightening of central banks all around the world wasn’t intended to cause a downturn—wasn’t intended to cause what it did. But I think lessons were learned from that. And I think it was really a marker that we’ve probably seen the end of the boom-bust cycle.”

Bloomberg’s Tom Keene: “Is it the end of the hedge fund business in modeling portfolios off the guesstimates of what central banks will do?”

Prince: “That won’t play much of a role nearly as it has. You remember the ’80s when we sat and waited for the money supply numbers. We’ve come a long way since then… Now we talk 25 plus [BPS Fed rate increase], 25 minus. We’re not even going to get 25 plus or minus and we got negative yields. That idea of the boom-bust cycle—and that history that we’ve been in for decades—is really driven by shifts in credit and monetary policy. But you’re in a situation now where the Fed is in a box. They can’t tighten, and they can’t ease—nor can other central banks, particularly the reserve currencies. And so where do you go from here? It’s not going to look like it has.”

Prince goes on to acknowledge that “cycles in growth are caused by the boom and bust in credit: Credit expansion, credit contraction,” but makes the assumption that “those expansions and contractions of credit are largely driven by changes in monetary policy.”

That may have been the case for much of the post-World War II period, but if we look back further, there is evidence to suggest that Prince’s hypothesis is another variant of the dangerous “this time it’s different” truism.

Why have so many people gotten this wrong?

The misconception probably stems from a famous statement made in 1997 by the MIT economist Rudi Dornbusch: “None of the U.S. expansions of the past 40 years died in bed of old age; every one was murdered by the Federal Reserve,” and this was more or less true of the U.S. economy from 1946 until the 2000s.

But then economic dynamics changed. Yes, the Federal Reserve raised the Fed funds rate by 400 basis points in the mid-2000s, but it reversed almost all of that move and began opening the floodgates of bailout financing by early May 2008. Nevertheless, the U.S. and global economy fell off a cliff in the second half of that year as global financial fragility erupted into a full-blown global systemic crisis to a degree unseen since the 1930s.

Why was it different that time? The reason is that there had emerged myriad asset bubbles and a related unprecedented rise in private indebtedness in the U.S. and other economies. These supports to cyclical demand expansion were unstable and unsustainable. In other words, these were conditions very similar to those that prevail today.

Hyman Minsky and Irving Fisher described how once the debt “disease” goes metastatic there will come a “Minsky moment” when euphoria gives way to concern and then to panic liquidation and credit revulsion. When that dynamic is in full flower, the Fed is powerless, no matter how much they want to bring the punchbowl back.

The U.S. and much of the global economy still have quasi-bubbleized assets and very high levels of private (and quasi-private) indebtedness. Bob Prince and many of his investment cohorts appear to remain oblivious to the threat of a Minsky/Fisher debt deflation dynamic, which the Fed and the central banking fraternity can do little to stop, if one is to judge from today’s current buoyant stock markets.

There is yet another way in which global economic growth can slow or even falter this time around, which I have discussed before (in the context of China’s economy): This thesis dates from “a very old idea from business cycle theory prior to the Second World War that private sector over-investment can become so unsustainably high that even without a fiscal/monetary shock, there could be a fall in autonomous investment. Once that begins,” a weakening edifice of highly suspect and marginal lending activity “can lead to a cumulative economic contraction even if interest rates plummet and monetary conditions ease.”

This old idea from the history of economics has largely been forgotten due to changes in the fads and fashions in academic economics. But there are grounds for thinking it is an idea whose time has come once again.

Globally, we have a glut of consumer goods, much of it emanating from China, but given increasingly weakening demand from an economy that is growing more and more skewed to the top 1 percent, we have fewer consumers able to buy it. Moreover, in China itself, modest fiscal stimulus measures undertaken at the end of last year could well be overridden by the onset of the coronavirus, which risks undermining the impact of these recent upticks in infrastructure investment, along with the potential benefits accrued from the cessation of the trade war with the U.S. government.

It follows that the world has a condition of over-investment that is unsustainable. This means there will be less investment to produce additional goods. Much like a rickety building on shaky foundations, therefore, a decline in global autonomous investment threatens to plunge us into a global economic slowdown, independent of actions by the global or national monetary authorities.

Are there any signs of this? Over the past year, global growth “recorded its weakest pace since the global financial crisis a decade ago,” according to the International Monetary Fund. This, despite buoyant risk asset markets, credit and money growth in key economies well in excess of nominal GDP, super-easy monetary policy everywhere, and an end of the fiscal restriction of recent years. Therefore, we cannot attribute this surprising softening to a “murderous Fed” (to paraphrase Dornbusch) or its cohorts in the global central banking fraternity. It is, however, possible to posit that we may be seeing a cresting of excessive global fixed investment, which eventually could cause a global recession. There is no question that our central banks and governments will try to do “whatever it takes” to postpone such a decline.

The point is that, relative to the post-war business cycle patterns in most people’s minds, the end of this global expansion does not need a “murderous Fed.” Excessive risk asset valuations and high indebtedness, even in a world of low prevailing interest rates and unprecedented central bank intervention, can nonetheless lead to negative financial and economic dynamics. And given excessive global capital spending in a world where the warranted rate of growth has now downshifted, an autonomous decline in excessive investment can do the same. Add to this the increasing risks brought about by the spread of the coronavirus, and you’ve got the ingredients for an incipient global economic calamity.

Marshall Auerback is a market analyst and commentator

When Charity Is A Mask For Brutal Exploitation

Our society has coined expressions like “philanthropist” and “season of giving” to encourage and hail people’s charitable spirit.

Look on the flip side of those shiny coins of generosity, however, and you’ll find that they’re made of a base substance of societal selfishness. After all, the need for charity only exists because we’re tolerating intentional injustices and widespread inequality created by power elites.

A supremely wealthy society (which so loudly salutes its historic commitment to the deeply moral values of fairness, justice and equal opportunity) ought not be relegating needy families and essential components of the common good to the vicissitudes of a season and the whims of a few rich philanthropists. Yes, corporate and individual donations can help at the margins, but they don’t fix anything. Thus, food banks, health clinics, etc. must constantly scrounge for more charity, while big donors have their “charitable spirit” subsidized with tax breaks that siphon money from our public treasury.

Especially offensive is the common grandiose assertion by fat-cat donors that charity is their way of “giving back” to society. Hello — if they can give so much, it’s probably because they’ve been taking too much! As business columnist Andrew Ross Sorkin points out, “All too often, charitable gifts are used … to make up for the failure of companies to pay people a living wage and treat their workers with dignity.”

Sorkin notes that it’s not just the unemployed who rely on food banks but janitors, nannies, Uber drivers, checkout clerks and others who work full time but are so poorly paid they can’t make ends meet. That’s not a sad charity case but a matter of criminal exploitation by wealthy elites — and the charitable thing to do is to outlaw it and require a living wage for all.

We must shift from charity to fundamental structural change. “The aim,” says Sorkin, “should be to create a society where we don’t need places like food banks in the first place. … we should be trying to put the food banks out of business.”

In the absence of structural change, our society relies on charity and government programs to address issues regarding poverty and hunger. While it’s fashionable in many enclaves of the rich to bemoan government programs that use tax dollars to aid the poor, guess who receives by far the fattest benefits from the public treasury. Bingo — if you said the rich!

Consider recent actions by President Donald Trump’s secretary of agriculture, Sonny Perdue. He’s been dubbed the “Georgia Goober” for his ignorant insults and preposterous policies, and he issued a harsh new regulation in December that’s both. It slaps poor people living in depressed areas with a sneering work requirement in order to be eligible for meager food stamp benefits, which amount to only about $127 a month. Yes, Perdue is literally taking food from poor people, piously claiming it’ll help them become self-sufficient. “(G)overnment dependency has never been the American dream,” preached Purdue, who has personally been dependent on a government check for more than two decades.

Crass hypocrisy, however, is integral to the Donnie & Sonny policy approach. Last year, they pushed out a $28 billion tax bailout for farmers impacted by Trump’s inept tariff tiff with China. Many U.S. farm families have been wrecked by Trump’s failed ag policies, but they’re not the ones who got the Trump government’s helping hand. The bulk of the billions went to the biggest, richest agribusiness interests that neither needed nor deserved a public handout — about 75 percent of the total was taken by the largest 10 percent of farm corporations (including foreign-owned operations). And, unlike a food stamp recipient getting a pittance to buy a little bit of food, some ag-biz outfits pocketed more than $2 million each from us.

But wait. Trump and Perdue have more meanness in store for the poor. They’re pushing another federal regulation that’d cut off food stamps if a low-income family has barely $2,000 in “assets.” Hello — that means a family that has an old used car to get to their poverty-wage jobs would be denied food assistance.

What’s wrong with these shameful public officials who perversely pamper the rich while taking pleasure in punishing the poor? It’s immoral.

Populist author, public speaker and radio commentator Jim Hightower writes “The Hightower Lowdown,” a monthly newsletter chronicling the ongoing fights by America’s ordinary people against rule by plutocratic elites. Sign up at HightowerLowdown.org.

New Research Exposes Costs And Lies Of Trump’s Trade War

Two new economic working papers from the National Bureau of Economic Research shared on Monday revealed the sweeping impacts of President Donald Trump’s tariffs and trade war and undercut his repeated claims about his policies’ supposed benefits.

Trump has repeatedly said, for instance, that the costs of his tariffs — which are just taxes on U.S. imports — are paid entirely by foreign governments and firms, rather than by Americans. But a paper by researchers Mary Amiti of the Federal Reserve Bank of New York, Stephen J. Redding of Princeton University, and David Weinstein of Columbia University directly rebuts that claim.

The authors noted that initial research had pointed to the fact that Americans were bearing the burden of the tariffs in 2018, when Trump’s aggressive trade tactics were initially enacted. But it wasn’t clear, they said, whether this would continue as the tariffs persisted.

And yet, they found that “data for most of 2019 does not alter the main conclusions of earlier studies. U.S. tariffs continue to be almost entirely borne by U.S. firms and consumers.”

They continued:

Similarly, we also finnd that the substantial redirection of trade in response to the 2018 tariffs has accelerated. Among goods that continue to be imported, a 10 percent tariff is associated with about a 10 percent drop in imports for the first three months, but this elasticity doubles in magnitude in subsequent months. These higher long-run elasticities suggest that the 2018 tariffs—many of which were applied in October—are only now having their full impact on U.S. import volumes.

What this means is that the longer the tariffs have remained in place, the more firms that rely on the imports shift away to buying other products. It also indicates that foreign firms aren’t dropping their prices to accommodate the tariffs, which would have meant foreigners rather than Americans are swallowing the costs of the policy, as Trump likes to claim.

There are some exceptions to this general finding, though, because the researchers noted that different sectors reacted differently to tariffs.

“The data show that U.S. tariffs have caused foreign exporters of steel to substantially lower their prices into the U.S. market,” they wrote. “Thus, foreign countries are bearing close to half the cost of the steel tariffs. Since China is only the tenth largest steel supplier to the U.S. market, these costs have largely been borne by regions like the EU, South Korea and Japan.”

But even in this case, where foreign firms are lowering prices because of steel tariffs, the authors added that this is actually “bad news for workers hoping that steel tariffs will bring back jobs.” The paper went on: “Indeed, the fact that foreign steel producers have lowered their prices in response to U.S. tariffs may help explain why U.S. steel production only rose by 2 percent per year between the third quarter of 2017 and the third quarter of 2019 despite 25 percent steel tariffs.”

Of course, all policies have some trade-offs, and some might think that even the costs of the tariffs are worth some other outcome. The problem is, though, that Trump has rarely if ever been honest about what the real costs of the tariffs are — he’s acted as if they are an unalloyed good.

And a separate paper, also from NBER, took a look at the impact of Trump’s tariffs on exports and also found major costs. Kyle Handley of the University of Michigan, Fariha Kamal of the U.S. Bureau of the Census, and Ryan Monarch of the Federal Reserve Board of Governors examined used what they describe as “confidential U.S. firm-trade linked data” to analyze the effects of the tariffs on U.S. exporting companies. One of the stated goals of Trump’s trade policy, after all, has been to increase U.S. exports and manufacturing.

The researchers found, however, that the tariffs appear to have “significantly dampened U.S. export growth.”

Why would exporters be hurt by tariffs, which again, are just import taxes? Because the taxes fell on many “intermediate goods” — goods that are used to make other products, which can then be sold by Americans to foreign countries.

“[We] find that almost one fourth of U.S. exporters imported products subject to new import tariffs,” they wrote. “Moreover, these firms account for more than 80 percent of U.S. exports by value. Affected firms were disproportionately larger than the average exporter in terms of total exports, employment, and number of plants.”

They even estimated how much these affected companies per employee, finding that the tariffs cost “$900 per worker overall and about $1,600 in the manufacturing sector.”

Overall, they report that the tariffs reduced export growth by about 2 percent. Had the tariffs not been targeted at such widely used intermediate goods, they found, the negative impact on export growth could have been slashed by 60 percent.

“Do not tax intermediate goods, or this is what happens,” said economist Noah Smith on Twitter in response to the paper.

How Trump And Mnuchin Slipped Billions In New Tax Breaks To Corporations

Reprinted with permission from Alternet

A “disturbing” New York Times story details how President Donald Trump’s Treasury Department, led by former Goldman Sachs banker Steve Mnuchin, has quietly weakened elements of the 2017 tax law in recent months to make it even friendlier to wealthy individuals and massive corporations.

Lobbyists representing some of the largest corporations in the world, the Times reported, targeted two provisions in the original 2017 law designed to bring in hundreds of billions of dollars in revenue from companies that had been dodging U.S. taxes by stashing profits overseas.

“The corporate lobbying campaign was a resounding success,” the Times noted. “Through a series of obscure regulations, the Treasury carved out exceptions to the law that mean many leading American and foreign companies will owe little or nothing in new taxes on offshore profits… Companies were effectively let off the hook for tens if not hundreds of billions of taxes that they would have been required to pay.”

The two provisions are known by the acronyms BEAT (base erosion and anti-abuse tax) and GILTI (global intangible low-taxed income). Shortly after Trump signed the $1.5 trillion tax bill—which slashed the corporate tax rate from 35% to 21%—lobbyists from major American companies like Bank of America and General Electric as well as foreign banks swarmed the White House in an effort to gut the BEAT and GILTI taxes.

Trump’s Treasury Department largely granted the lobbyists’ wishes, turning what was already a massive corporate handout into an even more generous gift to big companies and banks.

The Times reported:

The Organization for International Investment—a powerful trade group for foreign multinationals like the Swiss food company Nestlé and the Dutch chemical maker LyondellBasell—objected to a Treasury proposal that would have prevented companies from using a complex currency-accounting maneuver to avoid the BEAT… This month, the Treasury issued the final version of some of the BEAT regulations. The Organization for International Investment got what it wanted.

The lobbying surrounding the GILTI was equally intense—and, once again, large companies won valuable concessions… News Corporation, Liberty Mutual, Anheuser-Busch, Comcast and P.&G. wrote letters or dispatched lobbyists to argue for the high-tax exception. After months of meetings with lobbyists, the Treasury announced in June 2019 that it was creating a version of the exception that the companies had sought.

David Enrich, financial editor for the Times, said the newspaper’s estimate that major companies received tens of billions of dollars in additional tax breaks thanks to the Treasury Department is “conservative.”

“The cumulative effect,” said Enrich, “is that a tax law already disproportionately benefiting the richest of the rich has become an even greater windfall for the world’s largest companies and their shareholders.”

Sen. Elizabeth Warren (D-Mass.), a 2020 Democratic presidential candidate, tweeted in response to the Times story that “Trump is the most corrupt president in history, and here’s the latest example of how that corruption helps giant corporations at the expense of small businesses and working families.”

“Too many corporations are cashing in on all the benefits of America while skipping out on the bill,” said Warren. “Companies that make massive profits shouldn’t be paying less in federal income taxes than working families.”

As Hunter Blair of the Economic Policy Institute noted on the two-year anniversary of the passage of Trump’s tax cuts last week, “the $4,000 annual boost to average incomes that the White House Council of Economic Advisers promised to working families because of the [Tax Cuts and Jobs Act] did not—and will not—happen.”

“While it’s been worse-than-advertised for working families,” Blair wrote, “the TCJA has been an even bigger boon to large corporations and rich households.”